On March 18, 2019, the Executive Board of the International Monetary Fund
(IMF) discussed a paper providing country-level guidance on the role, and
design of, fiscal policies for implementing climate mitigation strategies
that countries have submitted for the 2015 Paris Agreement and for
addressing vulnerabilities in disaster-prone countries.

On the mitigation side, the paper presents a spreadsheet tool for judging
the likely impact on emissions, fiscal revenues, local air pollution
mortality, and economic welfare impacts of a range of instruments including
comprehensive carbon taxes, emissions trading systems, taxes on individual
fuels, and incentives for energy efficiency. It analyses possible uses of
the revenue from such instruments to, for example, lower the burden on the
economy from taxes on labor and capital, or to fund investments for
Sustainable Development Goals, as well as the possible distributional
impact. The paper also discusses the cases for voluntary carbon price floor
arrangements at the regional level, or among large-emitting countries, to
reinforce domestic initiatives and help address concerns about
competitiveness without resorting to trade penalties on other countries.

The paper stresses that mitigation instruments other than carbon taxes can
have an important role if, for example, higher fuel prices are politically
difficult or have limited impacts in countries that do not consume coal.
One such approach is the use of revenue-neutral tax-subsidy schemes to
promote cleaner power generation, shifting to cleaner vehicles, and
improvements in energy efficiency without an increase in fuel prices.

On the adaptation side, the paper stresses that a holistic strategy, going
well beyond physical climate-proofing investment, is needed in vulnerable
countries. Ideally, national strategies would encompass a variety of ways
to diversify natural disaster and climate risks, such as building up
contingency funds or participating in regional insurance schemes. The risk
of future damages also needs to be factored into projections of national
output and debt sustainability levels.

The paper considers the role that the IMF can play, working with other
organizations, in advising on the implications of climate commitments for
countries’ fiscal and macro policy given its expertise, universal
membership, and frequent interaction with finance ministers. In turn,
finance ministries have a central role in integrating carbon charges into
fuel taxes, ensuring carbon pricing revenues are productively used,
assisting vulnerable groups, and including climate investments in national
budgets.

Executive Directors welcomed the opportunity to consider the fiscal policy
implications of implementing the Paris Agreement and how the Fund might
help its members meet their mitigation commitments and support those
vulnerable to climate risks. They agreed that the Fund has an important
role to play in advising its members on fiscal policies to address climate
change and its impacts.

Directors welcomed the tool presented in the paper for analyzing policy
options for implementing mitigation commitments. They saw it as helpful in
assessing, on a country‑by‑country basis, the effectiveness of alternative
policies in reducing emissions, as well as their fiscal and economic
impacts.

Directors broadly recognized the potential of carbon pricing in effectively
reducing emissions and mobilizing revenue resources. Directors noted,
however, that other fiscal instruments or regulatory measures could also
have an important, and sometimes preferable, role to play, depending on
country circumstances and preferences. They agreed that countries’ policy
choices would need to take into account various aspects, including
efficiency, distributional, and political economy considerations. In this
context, some Directors observed that member countries should have
discretion to decide and implement policy options as they see appropriate.
Directors considered that further analysis of the full range of mitigation
instruments would be important to better inform the debate. They also noted
that research and development (R&D) and investment in new energy and
efficient technologies could play an important role in mitigation efforts,
while measures would be needed to relieve vulnerable groups. Regarding
carbon price floors, many Directors thought that such arrangements among
willing countries could reinforce the Paris process, but some other
Directors did not see merit or feasibility in this approach.

Directors emphasized the importance of a holistic approach to promoting
resilience in countries vulnerable to natural disasters and climate risks
in collaboration with the World Bank and other relevant international
organizations. They underscored the need to incorporate ex‑ante
resilience‑building in macro‑fiscal and financial frameworks, including
through fiscal buffers and climate finance. Directors also encouraged the
Fund to work with donors and multilateral development banks in exploring
affordable financing options for adaptation investments, especially for
low‑income developing countries. Continued Fund advice on cost‑effective
adaptation policies and capacity building support in these countries,
particularly small states, would be important to help address policy gaps
and unlock financing from all possible sources.

Directors recognized that the national mitigation commitments and
resilience challenges could have macro‑critical implications, and that the
Fund is well‑positioned to support countries in analyzing the fiscal and
financial impacts of their policy choices. In this context, many Directors
supported the inclusion of the economic implications of countries’
mitigation policies in Fund surveillance. A number of other Directors,
however, stressed that the Fund should avoid standardizing such analysis
and discussions, and allow individual member countries to decide on the
mode of engagement with the Fund in light of their specific circumstances.

Many Directors agreed that staff could periodically update the analysis of
the impacts of alternative mitigation policies using the tool staff had
developed for cross‑country analysis
. A number of Directors, however, cautioned against regular formal update
exercises that could go beyond the Fund’s mandate. Directors emphasized the
importance of continued close collaboration with other international
organizations active in this area, based on each organization’s mandate and
comparative advantage, to ensure that the Fund’s work remains complementary
to that of others. They also stressed the importance of ensuring close
alignment of the different aspects of work undertaken by the Fund in this
regard. A number of Directors saw merit in developing a staff guidance note
on how to approach climate change in Fund surveillance, focusing in
particular on adaptation policies, risk management, and mitigation
frameworks.

[1]
At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country's authorities. An
explanation of any qualifiers used in summings up can be found
here:
http://www.imf.org/external/np/sec/misc/qualifiers.htm.